1. Chapter 41 Chapter 15 Metrics: Performance Measurement in Purchasing

2. 2 Dimensions of Performance Measurement in Purchasing SuppliersPurchasing Function EfficiencyEffectiveness Internal Performance measures Support of corporate strategies

3. 3 Why a measurement system for Purchasing? “You can’t manage what you don’t measure” Communicate what is important to management Performance improvement Six to twelve major indicators is appropriate

4. 4 Setting performance standards or targets Historical performance + Performance Improvement Factor = Current Target Internally derived standards Set a level of excellence to be achieved Best performance level among SBUs as the company standard Benchmark against the industry leader

5. 5 Sources of information for benchmarking Industry consultants Trade Journals and general business literature Colleagues at ISM meetings ISM and CSCMP Annual Conferences “Best Practice” presentations Suppliers Contact a benchmarking target directly

6. 6 Efficiency Measures E-transactions as a percentage of dollars or purchase orders Percentage of suppliers e-enabled Percentage of suppliers that are pull-response suppliers Purchasing Administrative Cost as a percentage of the total spend Rush orders as a percentage of total orders Workload or output per buyer:

7. 7 Effectiveness: Internal Performance measures Actual price vs. target price Actual price versus market index vs 1.0371.029

8. 8 Effectiveness: Internal Performance measures Cost Effectiveness measures focus attention on efforts to reduce cost of materials or services COST REDUCTION = Hard Savings (through strategy or co-operation): e.g. Prior Price $42/unit New Price $38/unit COST AVOIDANCE = Soft Savings (through competition or negotiation): e.g. Quoted price or target price $112/unit Contractual price $105/unit

9. 9 Effectiveness: Internal Performance measures Standardization Number of items in materials catalog Percentage of items that are standard vice specials MBE Percentage of the spend awarded to MBE Internal customer satisfaction Quality of purchased items Score “Purchasing is a value-added contributor” 81%/19%

10. 10 Strategic Performance Measures Proportion of suppliers participating in ESI Proportion of quality-certified suppliers Total number of suppliers Proportion of strategic components single or dual sourced Proportion of the spend committed to long-term contracts Proportion of Purchasing’s operating budget allocated to supplier development Number of strategic alliances How effective is purchasing in supporting corporate strategies?